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European Banking Supervisory Board stress-tests 91 banks; the 47th Farnborough Air Show; Of 91 European Banks All But Seven Passed Stress Test; Swedish Banks Did The Best, Five Small Spanish Regional Banks Failed

Aired July 23, 2010 - 14:00:00   ET


RICHARD QUEST, CNN INT'L. ANCHOR, QUEST MEANS BUSINESS: All but seven European banks passed the stress test, whether it is enough to restore confidence in the system, that is another matter.

It may be the end of the working week, I'm Richard Quest, and tonight, I mean business.

Good evening.

Ninety-one banks, 20 countries, one test, but tonight, seven failures as a result of the EU stress test that have now been laid out for all to see. The plan was to counteract the fundamental fear of doing business with one of the banks that could go bust. The worry was the strain of an economic shock as a result of fragile economies. That uncertainty, according to people in the industry, has been the main reason why banks remain hesitant about lending to one another. To put it bluntly they are frightened they might not get their money back.

Well, now we know, parts of the Spanish banking sector could not take the strain. Five small Spanish bank did not make the grade, though, all the big listed banks, like Santander, most certainly did.

In Germany, the Deutsches and the Commerz, they got through without any difficulty. But one bank failed, Hypo Real Estate. And there was one failure in Greece, too. It was ATEbank.

A lot has been said about how stiff the test of the banks' finances actually was. The German economy minister said tonight, it was an important test, and he said it did have credibility. The test needed to be tough in order to have that credibility, even as the critics were saying it didn't go far enough. France's economy minister, Christine Lagarde, insisted tonight, in Paris, this was a testing process.


CHRISTINE LAGARDE, FRENCH ECONOMY MINISTER: Well, I'm pleased that the French banks have passed the test, and have passed it well; so none of the French banks is due to reinforce its current situation. And I'm particularly pleased because the test was hard. It was-it was a double edge, if you want. There was a first shock, which had to do with the recession, and the second shock, which included also a debt crisis, a sovereign debt crisis. So the combination of the two raises the difficulty of the test.

And all French banks have passed it and have passed it well. So, I'm very pleased about the results.


QUEST: Christine Lagarde speaking in Paris a short while ago.

Jim Boulden has been watching this all day.

The banks that failed, are they systemically, or seriously important?

JIM BOULDEN, CNN INT'L. CORRESPONDENT: I would say that we knew that Spanish banks were going to fail, we knew the German bank was going to fail. They already have been getting money from the governments. So the governments have already been bailing them out, already giving capital injections. In the German bank, of course, they have already nationalized it. So, the governments in those cases have already been dealing with them.

QUEST: So was this a sham performance? Was this a waste of time, that merely allows everybody to pat themselves on the back?

BOULDEN: Look, it is 100 pages long. A lot of the analysts are saying we have to go through all this very carefully to look for transparency, to look for serious numbers before anybody wants to make too much of it, either good or bad.

Let me look at-lift some of the quotes here, from the press release. They said that "the results suggests a rather strong resilience for the EU banking system as a whole." "Rather strong resilience", but they say, this "should not give you reasons for complacency". So they're not crowing too much either.

QUEST: The tier one capital-and incidentally for those who are not as familiar with the Basal regulations and tier capital, it is all to do with the amount of money you have to have in case things go very badly wrong.

The tier one capital, for all the major banks, is well over the rather paltry 6 percent that they required.

BOULDEN: Legal requirement, 4 percent; in this test, 6 percent. But I did some numbers though: Credit Agrico, 9.7 percent if it is good; worst-case scenario, 9 percent. Deutsche, close, 7.1 percent down to 6.6 percent. Overall, the banks on average would have fallen from a 10 percent tier one, to 9.2 percent, tier one. Way above the minimum requirements.

QUEST: I'm just going to talk a little bit about banking shares, which I'll give you a full update in a moment. But RBS, for example, finished higher, Commerzbank, in Germany. So the banks, the big European banks, the German, the French, the Swiss, and the British banks, they actually strengthened as a result of what we saw today.

BOULDEN: Bottom line, no shocking names in here, no worst-case scenarios that came out from any country that we were shocked about.

QUEST: OK, now, Jim. What happens next?

BOULDEN: Here's what we need to know. What happens to the Greek bank, for instance, now that we have this hypothetical failure, will they have to step in, will they force a merger? Some people are saying unless we see action, no point in a test, if there's no consequences for those who fail. And they want to know what those consequences are going to be? What will the government of Greece do?

QUEST: Jim will be back with me a little later in the program, don't go too far. There is a pub, it is a Friday. I'll be able to tell if you have been imbibing before.

BOULDEN: I'll be right.

QUEST: Oh, let's face it-let's face it after plowing through a 100- odd pages of the stress test, you could be forgiven if you had a lemonade, and no more.

All the Swedish banks tested on their balance sheets passed by a wide margin. One of the four testes is Skandinaviska Enskilda Banken, which I'm sure I've managed to mispronounce SEB. Anders Kvist is the bank's head of group treasury. And Anders joins me on the line now, from Stockholm.

Do you think, Mr. Kvist, that this was a real test of the stability and strength of the banks?

ANDERS KVIST, SEB BANK: I think it was a credible test. I think that banks put their best foot forward in making conservative assumptions on credit losses and on pre-loss income. And I certainly know that to be the case with the Nordic banks.

QUEST: So, for those banks that didn't make it, if you like, that failed. We already know they are undergoing a recapitalization project. It makes one wonder, what was the point of it all?

KVIST: Well, I think it is always the issue of, how much capital is enough? And I think stress tests serve a useful purpose of defining a range of possible capital needs. And when people come to grips with the various assumptions, surrounding these stress test scenarios, they will become more comfortable with the exact degree of recapitalization eventually completed.

QUEST: Were you comfortable with the fact that a sovereign debt default was not part of the core test?

KVIST: I think that is appropriate given the support that the European Union has given to its members. And I think focusing on the market-to-market fluctuations, in terms of losses, through increasing spreads.

QUEST: Right.

KVIST: On rating portfolios, is the appropriate perspective here.

QUEST: So, now-if the goal of this whole operation was to get banks to feel more comfortable about interbank lending, thus we could see EURIBOR and LIBOR coming down. Will it be successful? Or is that still an inherent suspicion in the interbank market?

KVIST: Well, I think the dislocation in money market rates may have many causes, and lack of confidence is just one of them. I think one must take a realistic view on the stress test. They are one way of improving confidence. I do think that in certain individual cases, among the 91 banks, counterparties will feel relieved. Once they see the end results, once they look at the loss assumption. So, a small step in the right direction in terms of more confidence, mutually, and ultimately better- better rates.

QUEST: Anders Kvist from SEB in Stockholm on this Friday evening. Many thanks for joining us.

Now, stocks in most European markets made just modest gains. Well, you see, the way they had done it, it is all caution, because investors had to wait for the results of the banking test, which didn't come out until after the markets closed. Let me update you with the big four, the indices. They all made some sort of gain on the week. They got some help this session from the EFO survey in Germany, which rates business climate. EFO rose. Shares of Adidas climbed more than 2 percent in Frankfurt, on Q2, and the World Cup boost. The FTSE closed almost unchanged, despite the news the British economy grew faster than expected in the quarter, in fact, the fastest for some four years.

But if we now look at banking shares, that was a mixed picture as I alluded to a moment ago. In London, the Royal Bank of Scotland finished higher, as did Commerzbank in Germany. Spain's listed banks were under pressure. Banco Popular ended down three quarters of a percent. Santander, now one of Europe's largest, was up 1.34 percent.

The Dow Jones industrials, in New York; the Dow is the only market trading, now we've actually got the results, and it is up 1 percent, a gain of .98. The Dow currently 10,420, but you can see that on the screen for yourself.

When we come back, as we consider the strain in Spain, most banks made the grade according to the regulators. We'll hear from our man in Madrid, where tonight, they are a few casualties. The walking wounded, in a moment.


QUEST: QUEST MEANS BUSINESS live tonight from the River Thames, or the banks of the River Thames, near the city, and the center of the financial district.

One country stood out from the rest in the EU stress test. You didn't need to be that octopus with psychic powers to predict it this morning, but that country was Spain. Five regional savings banks, the Cajas, have been exposed as incapable of weathering this hypothetical economic shock. The governor of the bank of Spain says it is important to view the results in context.


MIGUEL FERNANDEZ ORDONEZ, GOVERNOR, BANK OF SPAIN (through translator): As you know the stress tests, at least in Spain, are taking place during a time of profound restructuring and recapitalization of the Spanish banking system. In particular, the Spanish savings banks.


QUEST: Let's put this in perspective and go to Javier Ruiz at our Spanish affiliate, CNN+. Javier joins me live from Madrid.

Slightly embarrassing to be-to have five of the seven from Spain. But Javier, they are already sorting that out.

JAVIER RUIZ, CNN+: Well, yes. Hi, nice to meet you.

In fact-well, you cannot fail the exam if you don't attend to it. That is what has happened in Spain. In Spain 95 percent of our banks were examined. They were put under the stress test. Therefore, you have more failures than the rest of Europe, where you have had 50 percent of the market share examined, but not the rest. I'm guessing that this is not a big deal and that is how it is taken here. The governor of the market here, the governor of the Bank of Spain, sorry, said, you know, we've been overlooking more banks than anywhere else, and therefore we have more failures than anywhere else.

QUEST: You see that was interesting, there were 27 Spanish banks on the list. But those small regional, important banks, which will not be consolidated, is there a feeling in Spain tonight that the days of the small Cajas bank is gone?

RUIZ: Well, there was a feeling before the stress market, and I think that is feeding on tonight. I'm guessing-or we're basically thinking that, you know, the stock market-the market for the Cajas has changed. Actually, the law for the Cajas has already been changed by the government and mergers are being forced, as we speak.

One of the big failures here is Cajas Catalonia, it is the main or one of the main Cajas in Catalonia. And that is a problem. The rest, the really regional, very small Cajas and it is not a big deal.

QUEST: Right.

RUIZ: Aside from that, again, I'm saying they are going to be forced to merge. So that is going to happen.

QUEST: Javier, many thanks, indeed. Have a good weekend. Javier Ruiz, joining me from Madrid.

Now, before the results were out there was some speculation we would see banks in Portugal fail the tests, too. In fact, Portugal was one of those countries that everybody said some would actually fail. But they did all pass. And Banco BPI was one of the banks that was tested and passed. The Chief Executive Fernando Ulrich, is on the line now, from Lisbon.

Mr. Ulrich, you passed the test. Portugal's banks all passed the test. That was something of a surprise.

FERNANDO ULRICH, CEO, BANCO BPI: Well, not for us, because we knew that Portuguese banks have been managed in a cautious way. And we didn't suffer from the same problems that other countries suffered in previous years. Namely we didn't have the real estate bubble, so we were in a relatively better position to pass this test.

QUEST: As the inspectors and the supervisors came into the banks, was there-was it a very detailed, long-standing difficult process to go through? As each scenario was put before you, and you had to run the models through the computers?

ULRICH: Well, we didn't have to run the models. The models, that work was done by the regulators, by the central bank, and by the European authorities that were coordinating this process. The role of the banks was to provide information according to the inquiries that were put to us. And those were very detailed and very vigorous.

QUEST: Right.

ULRICH: But the models were the same for all banks and were defined by the regulators.

QUEST: As you look to the next stage in the whole process of the consolidation, the recapitalization, the interbank lending arrangements, do you believe tonight, that the European banking system is not just sound and safe, but actually secure?

ULRICH: That, I have always thought, and I certainly believe in that. We as bankers, in BPI, the bank continues to and has always continued to lend to other banks in Europe. We have not closed lines of credit to other banks. And so we have continued to be an active participant-actively participating in the interbank market in the Euro Zone, and I think that from Monday onwards, confidence will be a little better. And especially, as governments show determination to control fiscal imbalances.

QUEST: Right.

ULRICH: I think confidence will return even strongly.

QUEST: Mr. Ulrich, we could talk about fiscal imbalances for a good deal longer, but we're out of time tonight. We'll have to hopefully talk to you in the future on that subject. Fernando Ulrich of Banco Popular- Banco BPI, I beg your pardon, joining me live from Lisbon.

In just a moment, he founded a successful bank in the U.S., and he thinks it is a good time to get a new one up in austerity Britain. This gentleman is Vernon Hill, he will be with me just after the break.


QUEST: Here in Britain, the four big banks subjected to the stress test came through unscathed, including two that had to be propped up with taxpayers money. HSBC and Barclays, which shunned state support and indeed, went to Gulf support, were rated a pass, along with the part- nationalized Lloyds Banking Group, and the mostly nationalized Royal Bank of Scotland.

We are joined now by a man who founded Commerce Bank in the 1970s, in the U.S. and four decades on, is behind the launch of Metro Bank. It will be Britain's first new High Street lender in more than a century.

Good evening to you.


QUEST: First of all, look, you know banking backwards. That is fair to say.

HILL: Thank you.

QUEST: So what did you make of these stress tests? Were they rigorous? Were they detailed? Did the make sense.

HILL: I'm far from an expert on stress tests in Europe, but certainly they're a helpful step to bring faith back to the market.

QUEST: That faith that they will bring back. Let's focus on those that succeeded, not those that failed. What does it give them, in that sense, to create that faith?

HILL: As you know there has been a fear between the major banks in Europe to lend to each other in the bank market. And it is another test of faith. It is not the answer, it is not the final answer, but it is another step.

QUEST: But what would give that faith, more faith, what do you want to see? Because you are about to start a bank here.

HILL: Yes, we are starting the first new bank, in a long time, in Britain. And we are not going to borrow in the interbank market, we are going to build a bank on growing deposits. So, it is a different kind of model.

QUEST: Right, it is a different type of model, but you still are going to have to have-to maintain capital tier ratios, and tier one ratios, and all the usual ratios that have to be held?

HILL: Actually, we are the only bank that now meets the new higher capital standards in Britain.

QUEST: What will you be hitting? I'm not sure the exact number, because there are tiers based on our size and the length we'd be in business. But let me say it this way, we-the newest highest capital standards in Britain are applied to our new bank.

QUEST: Why do you want to open-I've got to ask this question, I mean-why do you want to open a bank in Britain? I mean, let's face it-oh, I see you can make money at it. But it is a very competitive market for the U.K. You have four very large banks, along with one or two others, building societies. So why do you want to join in?

HILL: Well, first of all I built four new banks in the States, and we've had great success on a simple model. Customers care about service more than they care about-more than they care about rates. And we've built large banks and we came to Britain with this model because the Britain's are saying that they are dissatisfied with their banks, and they want something better.

QUEST: And your first branch opens?

HILL: July 29, which is next week.

QUEST: Next week. All right. Well, they we are. Good luck.

HILL: Thank you very much.

QUEST: No doubt, at some point, you may face up to stress testing.

HILL: I may well.

QUEST: You never know.

Now, many of you will remember we have been through this stress testing before, just over a year ago. U.S. officials put 19 major U.S. banks through similar tests. Just as their people are saying the European tests were too mild, the procedures in America have critics as well.

Maggie Lake has more from New York.

My memory is a little hazy, Maggie. Remind me, some failed and had to be recapped.

MAGGIE LAKE, CNN FINANCIAL CORRESPONDENT: Yes, about 10, in fact, Richard. But-and you are right, there was certainly criticism. They are not rigorous enough. There are people concerned that if you don't have major failures and some banks going under, merging, that it wouldn't have proven to be a success. But in the end, it actually was a massive turning point for confidence and in some ways it is why the Europeans are going through this process as well.

But-there is always a but-there are huge differences and it is part of what you are hearing in terms of the reaction here, and that is the transparency. You'll remember the U.S. banking regulators released the whole layout, the whole spreadsheet of what was going to happen a month before hand. Investors could go through it themselves, come to their own conclusions as well. Banks saw what was needed, were able to go to the private market, get the money that they needed, in many cases before the actual results came out. And so all of that was a real confidence building exercise.

This afternoon, as folks here are reacting to the European stress test, they are saying, where is the transparency? There is not enough detail on the methodology. You know there is some concerns about the sovereign debt, it is on trading books, and not on these, you know, on some other parts of the books, so are they fudging it? So, there is a little bit of a hangover on the transparency issue on this side of the Atlantic, Richard.

QUEST: OK, now I don't want us to get too detailed, but we are now- we now have these results on both sides of the Atlantic. But, Maggie, now everybody has to try and reach an agreement on the so-called Basel III of European regulation-of international regulation. And that is going to prove even more difficult to get a common standard.

LAKE: It certainly is. And I think the exercise that you saw the Europeans go through, one of the reasons that you didn't see those details ahead of time, is it underscores just how difficult it is to get everyone to agree on some sort of global standard. It is not likely to happen. It is going to be a tall test. The politicians keep saying, it is necessary we know, in a global banking system it has to be. But getting everyone on the same sheet, there is a lot, a lot of skepticism that that is going to happen in the banking community, over here, Richard.

QUEST: Maggie Lake, joining me from New York. And I actually thought, Maggie, it would be me that would have the umbrella up, raining on the parade of the banks.


LAKE: Oh, exactly.

QUEST: No, I'm delighted to say-well, it is-look, as viewers will see in just a second, it is threatening, but it is not raining yet. Maggie Lake, many thanks indeed.

So, what was Europe's formula for testing its banks? When we come back, Jim Boulden takes a closer look at jargon buster, the phrase is "what if?" And we sent him back to university to cut through the jargon. QUEST MEANS BUSINESS, we're live tonight, in London.


QUEST: Hello, I'm Richard Quest. QUEST MEANS BUSINESS, live from beside the River Thames, in the heart of London tonight. This is CNN, and on this network, the news always comes first.


QUEST: Now more on our top business story today. Of course it is the European regulators who say the banks within the region are well-equipped to weather future economic shocks. They stress-tested 91 banks. That's more than 65 percent of the European banking system. The question I've been asking: What kind of hurdles did the banks have to jump?

After all, how do you stress test a bank? Luckily for us, we have a Jargon Buster from Jim Boulden.


JIM BOULDEN, CNN CORRESPONDENT: Sometimes you're not sure when something will give way. You've got to put it to the test to find its breaking point. The economic crisis caused stress for many of us. Economies teetered, auto companies were rescued. Banks went under or were taken over. What if those stresses returned?

The committee of European Banking Supervisors have been putting its banks under a lot of stress to see if any of them will break under certain hypothetical economic shocks. These so-called stress tests are a response to the current mood. Banks are afraid to lend. They don't trust the guy on the other side will survive, and there are other concerns.

How much government debt the banks are carrying, and is it Greek debt or German debt that sits on the books? Then there are all those dodgy property loans floating around. New banks hold adequate capital in reserve to withstand the stress.

The hope is the banks will be nice to each other once again, and that analysts and rating agencies won't have to guess how healthy a bank is. But like the banks, this stress test themselves have been under the microscope.

If the vast majority of the banks pass, the test could be seen as too easy. If many fail, might it do nothing more than scare an already fragile market. In the U.S. the stress test played out last year. One big different though is that the U.S. Treasury had money standing by to help recapitalize struggling banks.

What will European governments be able to offer banks that are too stressed out? Easy mergers? Money? Or just a spark to help them burn out. Well I guess there's no point to the test if there are no consequences to those whole who fail. Jim Boulden, CNN, London South Bank University.


QUEST: And Jim joins me now. You obviously had a lot of fun doing that.

BOULDEN: Well the burning out of the magnesium at the end there, the idea of course is should some of these banks fail? We know that the Spanish banks are going to be merged together, but there has to be consequences in this.

QUEST: Consequences that taxpayers, Jim?

BOULDEN: Yes. Will this is one of the things you're talking about. Spain has said already they're going to have to do some things to make sure Monday morning when the banks open that there isn't a run on the bank. They want to make sure the depositors know that they're okay.

QUEST: Let's talk about the additional stress that was put on us and the financial world by announcing these results --

BOULDEN: After the market.

QUEST: -- after the market.


QUEST: I'm not going to ask for your opinion on this, but what's your opinion on this?

BOULDEN: Look, they didn't want to have this 100-page document come out at 3:00 in the afternoon, or 1:00 in the afternoon and have people overreact or under react. They didn't want to have, you know we talked about liquidity being thin on a Friday afternoon.


BOULDEN: And they were afraid of that being one of the problems. But we also know what's happened the last two years. Remember how every weekend they had to get something out to calm the market come Monday morning. So they're really worried about doing this on a Monday or Tuesday so they wanted to do it on a Friday, and they debated it a lot. It was not a unanimous decision.

QUEST: Many things indeed. Nice work. Thank you for having fun at our expense. All right. When we come back, earlier in the hour, we heard from Christine Lagarde, France's economy minister who is upbeat about the French banks and their showing in the test. In face of the test, well, a bit of calm goes a lot way. We're back in Paris in a moment to look at how the French banks performed. "QUEST MEANS BUSINESS" we're live tonight in London.


QUEST: Welcome back. Quest means business on a lovely Friday evening in London, and we now have the results of the European stress tests for banks. The committee of European Banking Supervisors is not a body that makes the news headlines every day. Most of us have barely heard of them until the stress test came along.

But when it published the results on Friday, sitting with the CEBS was Marco Buti, the EU's Commission Director General for Economic and Financial Affairs. He supported the credibility of the tests.


MARCO BUTI, EU COMMISSIONER, ECONOMIC AFFAIRS: I think this is an exercise which will mark an important step in the development of the crisis. We have the problem of self-confidence in banking sector, banking system in the EU that has been looming doubts in our vulnerabilities. We have always maintained that the bulk of the banking system in the EU is sound and I think this is confirmed now by the stress test.

Of course there have been pockets of vulnerability. We have said that, and the stress tests have identified pockets of vulnerability in extreme circumstances. I mean what is clearly remarkable I think in the stress test is the degree of transparency, the fact that we put on the table for all of you for the markets all the information.


QUEST: As we heard earlier this hour, Christine Lagarde, the French economy minister also publicly backed the tests which were rated all the French banks with a strong pass. I'm joined now by Richard Parolai in Paris. He's a finance lawyer with the firm Orrick, Herrington & Sutcliffe. Richard, is there a danger that everybody says they passed the tests so therefore no more work needs to be done on that?

RICHARD PAROLAI, PARTNER, ORRICK HERRINGTON & SUTCLIFFE: Well I don't think the danger exists, because I think this is the process, and this is something to be stressed. This is the first time a level would manage to coordinate and harmonize the test on a global basis, and I think this should be stressed heavily, and I think this is the beginning of the process which ultimately should induce transparency. It should restore confidence with investors and amongst the banking community.

QUEST: The worry remains though. The transparency of the process. Yes, we know the seven that failed were always going to fail, but the transparency of the numbers underneath it. Now, it'll be some days before we get to grips with that, but are you comfortable with it?

PAROLAI: I think the process and the model being applied will approve over time, and it will improve and will become more transparent, more coherent, and more coordinated amongst all the regulators, and we are at the beginning of a process, and I think we should be very satisfied that European regulators managed to reach this level of coordination and organization which is again, the beginning of a consolidated regulatory organization in Europe.

QUEST: But they still have to go that next stage further, Richard, which is to come up with a harmonized, European banking regulation structure. And we know that there are big differences between what the Parliament, the Commission, and some countries like the U.K. actually want. Fundamental differences.

PAROLAI: And this is the difference between the U.S. market which is already one, single, unique market, and the building of Europe which is an ongoing process, and I think this is one long mark stage in the building of a European process, European regulation and it is true that there are some hurdles to overcome. But I am confident that with all these results, the struggles will be paced in the future.

QUEST: Richard, many thanks indeed. Richard Parolai joining me from Paris. We thank you. I can promise you tonight there aren't many programs that would have you from bankers in Paris, we were talking to New York, Stockholm, and London, all the major places we need to hear from. But we do now need to get you up to date with your weekend weather forecast.

We know tropical storm Bonnie has made landfall in Miami. As for the weather forecast in London, I can save you the trouble. It is sunny over there. It is cloudy over there, and rain is imminent. What have you got for the rest of us?

UNIDENTIFIED MALE: It is actually 7:41 pm and you have sunshine. I told you that today was going to be nice. I'm telling you tomorrow is going to be nice, and then some more clouds are moving in for Sunday and Monday. Do you have anything to say about that? I hope you like it.

QUEST: No. I'll take that so far as what you've offered, and now give us the forecast for elsewhere in the world.

UNIDENTIFIED MALE: Well, it continues to be very hot in the east, and actually we have windy conditions here in the south. But people in Russia and Ukraine, in Bellerose here, in Turkey, in Balkan Peninsula with above- average temps actually were reached in Moscow, 37 degrees, believe it or not.

The storms are going to come here into Germany now. So for the time being, Britain will be fine, but look at this. This gets to a point that it's very uncomfortable. 37 in Moscow. The storms in the Alpine Region, Germany, outside parts of France, and into Poland too delays. Maybe Munich. Also Vienna with windy conditions, elsewhere the weather is going to be fine we think.

This weekend will be windy in Italy too, and I have to say that temps are going to be okay in the west, except for Madrid at 35 degrees. While we're looking at this tropical storm Bonnie that made landfall in Miami, it's moving into the Gulf of Mexico.

We do not think it's going to be a hurricane, Richard. It is going to bring problems in the area, but we do not think that it's going to be terrible by the way. Have a nice weekend.

QUEST: And to you. Come back to us safe and sound in one piece. Now one other story that I need to bring to your attention tonight. The Ford Motor Company has reported very strong second quarter profit of $2.6 billion dollars. It's the fifth profitable quarter in a row. Earnings exceeded Wall Street estimates, and we will bring you an interview with Ford's Chief Executive Alan Mulally, that's on the company's turnaround, and it's fortunes.

And that is Quest Means Business for tonight. I'm Richard Quest in London. Whatever you're up to in the hours ahead. I hope it's profitable. Marketplace Middle East is next. Thank you.


JOHN DEFTERIOS, CNN HOST: This week on Marketplace Middle East, there's something in the air. The regions carriers are again the big spenders at the world's largest air show. Plus, a glimpse behind the scenes. Join the CEO of Qatar Airways, Akbar Al Baker for a tour of Farnborough, and --

We are a global business. We are impacted by a range of global factors, but you have to work through it.

James Hogan of Etihad on the challenges facing the entire aviation industry.

The 47th Farnborough Air Show took off this week with the arrival of Boeing's long-awaited 787 Dreamliner. The nine-hour flight from the west coast of America to southern England was the plane's first time outside the U.S. Boeing also got a boost for Emirates this week. The Dubai-based airline placed a $9 billion order for 777's. Emirates, as well as the other Middle East players were hard to miss at the event, as Jim Boulden found out.


BOULDEN: Emirates Airlines and Dubai took no time to kick start this year's Farnborough Air Show out by London. It's order for 30 more Boeing 777s takes its fleet beyond 100 of the long range planes, adding evermore heft to the bulging airlines and expanding airports of the gulf.

So what is the need for all the planes ordered at air shows like this now? Well analysts predict that the big airlines of Abu Dhabi, Do Ha, and Dubai will carry some 170 million passengers by 2020. That's double what they carry at the moment.

But Abu Dhabi is not content with just buying aircraft and moving transit passengers. As part of a move to diversify its oil-based economy, the emirate is manufacturing new component for Boeing and Airbus.

UNIDENTIFIED MALE: Abu Dhabi is also set on the very ambitious path of growing the aerospace industry. We find that a very exciting strategy and we want to be part of that, and this is why we think we should be there with parts manufacturing as well.

BOULDEN: And at this Farnborough Air Show, Abu Dhabi's state-owned Mubadala Aerospace signed a deal with Goodrich to maintain and repair landing gear for a number of aircraft, including the A-380s. And with Honeywell, to use its parts to maintain the region's new Boeing 787 Dreamliners and Airbus A-350s.

UNIDENTIFIED MALE: With the Middle East, about 20 percent of the future orders of the wide buggies and commercial planes, so it makes sense to get into the maintenance, repair, overhaul, and the services industry around that operation.

BOULDEN: One big challenge in this goal, Mubadala wants to train UAE nationals to replace the majority of its aerospace expatriates as it builds this global hub for the aerospace industry. For Marketplace Middle East, I'm Jim Boulden.


DEFTERIOS: Airbus and Boeing grabbed most of the attention at Farnborough, but they were just two of over 1300 exhibitors from 38 countries. This was the first Farnborough since the record-breaking 2008 show when orders worth almost $89 billion were announced. This week Qatar Airways talked to Boeing 777s adding two more for about a half billion dollars.

I joined the airline's Chief Executive for an insider's view about what goes on behind the scenes.


DEFTERIOS: Akbar Al Baker is a fixture at one of the sector's biggest events. We spent a day getting the sense what a chief executive gets up to. First stop on this journey, his new Boeing 777-300, where he chose to put only nine seats across in economy class.

AKBAR AL BAKER, CEO, QATAR AIRLINES: There are airlines that have 10, but how they achieve it is by reducing the seats by two inches, reducing the aisle width by six inches.

DEFTERIOS: And then to business class where he shares a passion for the little things.

AL BAKER: What is important is that we look at every small detail that you require.

DEFTERIOS: Outside, we talk about the new technical capabilities.

AL BAKER: The last two wheels on either side turns together with the nose wheel.

DEFTERIOS: Oh my goodness.

AL BAKER: To make it be able to make --

DEFTERIOS: It's sharper turns.

AL BAKER: -- sharper turns.

DEFTERIOS: Al Baker has been at the helm of Qatar Airways for 13 years. In year 14, the airline plans to have 100 plans reaching more than 100 destinations. While we are touring the grounds, Emirates Airlines announced another giant order. Al Baker does not mention any names, but points to the efforts by some to make a big splash at a big show.

AL BAKER: Especially with Airbus and Boeing. They all want to have big announcements.

DEFTERIOS: To roll out at the air show?

AL BAKER: Exactly.

DEFTERIOS: Using a shortcut through the exhibition hall, the chief executive makes his way to a press conference announcing a move into the corporate jet market. Qatar Airways continues to spread its wings. Not to keep pace with its neighbors, says Al Baker, but with the gulf state's own economy, one of the fastest growing in the world.

DEFTERIOS: So you must have some concerns that all this capacity is being added in the neighborhood, that it throws off your business plan?

AL BAKER: We are going to make sure that all this capacity that is added around us would not deviate us from the plans we have. Without expanding in a way that we will not be able to sustain and that hubs like Dubai and Abu Dhabi will start undermining our airline. This will not happen.

DEFTERIOS: Doha will open a new airport in two years to handle 24 million passengers. As it expands, Al Baker says Qatar can double capacity when needed.

DEFTERIOS: China, Japan, Africa, Latin America. These are the real hubs of growth, have been for the last five years. Is that the strategy going forward then?

AL BAKER: And you will notice that this is exactly what Qatar Airways is doing. So as you know that that his happening, and this is what exactly we are doing, which means that what we are doing in our strategy going forward is correct.

DEFTERIOS: Despite real concerns Al Baker has about another slowdown in Europe, he is adding another seven European routes by early next year. He calls those routes bright spots amidst some darkness. His competitors are crying foul.

AL BAKER: If the legacy carrier do not have the guts or do not have the courage to take opportunities or to expand or to continue their services in areas or regions, it is their problem. Quite frankly this is crap what they are saying.

DEFTERIOS: Says the man who has a reputation in these circles for fast growth and absolute candor.


DEFTERIOS: Up next, carving out its own growth plans, we hear from the man in charge of one of the youngest carriers in the region, James Hogan of Etihad.


DEFTERIOS: Despite increasing passenger growth in the region, the plans of the gulf carriers are not without risk since they all have grand ambitions to expand in the future. One of those is Etihad, which is growing alongside the capital of the UAE, Abu Dhabi.

I caught up with its CEO, James Hogan, at his headquarters to discuss that carrier's strategy.


HOGAN: Have you been in here before?


HOGAN: This is the IAC.

DEFTERIOS: James Hogan has been in the airline and travel sectors for three decades. But he's running his current carrier like a man in a hurry. Hogan is Chief Executive of Etihad, the six-year-old flag airline of Abu Dhabi, the capital of the United Arab Emirates.

With 53 planes going to 63 destinations, Etihad has quickly emerged on the scene to help build out the brand of the UAE capital. The Emirate is spending $7 billion to become a major destination built around all things related to tourism -- F1 racing, world class museums, and top flight business conferences.

Etihad is an upstart emerging from the shadow of the giant next door, Emirates Airlines. The airline of Dubai has the region's largest fleet with 147 aircraft carrying 22 million passengers a year. It just opened its new airport to cargo traffic at Dubai World Central. Abu Dhabi plans to unveil its brand new terminal by 2015 to handle $21 billion worth of planes it has already ordered.

Here at Etihad's network operations center, you get a sense of why the region sees itself as a bridge between east and west and that's how Etihad and its competitors are positioned themselves for growth. The real question is will they need all this capacity in the new few years?

HOGAN: My first answer is let the consumer decide who wins. I think what's important to understand with this part of the world, we have a great region that is really coming alive. Within three hours flying time, I have India. I have South Asia. I have the Middle East. I have the GCC. Combined, a population greater than China. It's a regulated market. These are opening up.

The gulf hubs will become competitive to the Asian hubs and the European hubs and the advantage I probably have over the legacy carrier is that I have set up in the last six years. The advantage I have is that clean sheet of paper.

DEFTERIOS: If I was going to cut the world in half with Abu Dhabi being at the center and looking east and looking west, where is the real growth in terms of your passenger traffic going to come from?

HOGAN: What's more important to me is how much of my traffic is destination Abu Dhabi and how much transfers over the hub? If you look at our business today, 50 percent of our traffic is coming to Abu Dhabi, 50 percent is transferring over the hub. Now that's a good mix when you look at the quality of the yield.

DEFTERIOS: What is your benchmark as you have Emirates in the market for better than a quarter century, and this largest fleet in the world, and about three times the size in terms of passenger traffic. You feel like you have to compete with your neighbor and very aggressive Qatar Airways in the market as well?

HOGAN: Well, what's important to me is meeting the shareholder's expectations. And the shareholder has three key messages to me as the CEO. Firstly, build a best-in-class airline. Not the largest, but where you decide to compete, whether that be first, business or economy, best in class.

The second part of it is obviously support the aspirations of Abu Dhabi within their 2030 vision. Abu Dhabi is a very exciting city today but over the coming years will become more so. And an airline has an impact on any economy in regard of the multiplier into a range of sectors. But as importantly, the third part of that is move for profitability.

DEFTERIOS: So you're behind in profitability. I think you wanted to get there this year, but you're looking at the end of 2011 now?

HOGAN: I think if you have a look at the results of the European carriers, we're not the only ones who's behind in 2010.

DEFTERIOS: Right, you the worst business in 50 years.

HOGAN: Well, we had two things. We had the financial crisis, but we also had the pandemic. But that's the nature of aviation. You know we are a global business. We are impacted by a range of global factors, but you have to work through it.


DEFTERIOS: Once again, James Hogan of Etihad. And that's it for this edition of CNN Marketplace Middle East. I'm John Defterios. Thanks for watching. We'll see you next week.